Why Interest Rates Are Rising Everywhere—Except Your Savings Account
Many banks continue to offer meagre yields on savings accounts, but it can pay off to shop around
Many banks continue to offer meagre yields on savings accounts, but it can pay off to shop around
The US Federal Reserve’s campaign to fight inflation by raising interest rates seems to have reached nearly every corner of the economy except one: Americans’ savings accounts.
Mortgage rates doubled this year to nearly 7%, and it has become more expensive to get a car loan or carry a credit-card balance. Yet the interest on savings accounts barely budged. In March 2020, the average annual yield on a standard savings account was 0.1%, according to Bankrate.com. It fell to a pandemic low of 0.06% after Americans’ personal saving rate peaked, and is now up to a wan 0.14%.
US commercial banks held $16.8 trillion in deposits as of June, according to the Federal Deposit Insurance Corp. Much of that vast sum sits in individual checking and savings accounts, earning little interest and losing significant value to inflation. There are savings accounts that yield as much as 3%, for those willing to shop around.
At a hearing on Capitol Hill last month, Rep. Michael San Nicolas (D., Guam) remarked on depositors’ underwhelming returns to the leaders of the nation’s largest banks. “One of the only silver linings in a rising interest rate environment is that savers are supposed to be rewarded for their savings,” he said. “They’re supposed to see the interest that they earn on their savings accounts go up.”
In response, the bank chiefs said that they expected the interest rates on their customers’ deposits to increase in the future, based on the actions of the Fed and their competitors.
The country’s largest banks can keep payouts on savings accounts low because they seem to have plenty of deposits to cover their lending businesses for now and don’t need to attract more by raising interest rates.
Some other banks are offering some of the most generous yields in years, but those still paying out meagre interest can count on customer inertia: We fail to take advantage of better deals, because switching banks seems like a headache.
Were that dynamic to change—that is, if enough consumers took their money elsewhere in search of higher returns—banks would be compelled to raise interest rates or make fewer loans, said Philipp Schnabl, a professor of finance at New York University’s Stern School of Business.
Some banks, particularly online ones, have inched up yields in response to the Fed’s rate increases. The annual interest on an online savings account at Ally Bank rose from 0.5% in May to a chunkier 2.1% last month. As of Sept. 30, according to Bankrate, the highest-yield nationally available, FDIC-insured account was UFB Direct, which was paying out 3.01%.
Greg McBride, Bankrate’s chief financial analyst, advises shopping around. “If you’re looking in the right place, it is the best you’ve seen since 2009,” he said. “If you’re just standing pat at the same place you’ve always had your savings, it probably doesn’t look a whole lot different than 2021.” (Bankrate earns money when customers open accounts using offers on its website.)
Even high-yield savings accounts are a weak buffer from 8.3% year-over-year inflation, but their annualised returns of 2% or 3% still beat a return of 0.01%. The median balance of a transaction account, which includes checking, savings and other accounts, was $5,300 in 2019, according to the Federal Reserve, the latest data available. Receiving 3% interest on that balance, versus 0.01%, would work out to a difference of about $160 a year—not an enormous amount of money, but also not bad compensation for opening a new account, which can typically take about 15 minutes of work.
People with much larger balances stand to gain more, yet those depositors don’t always bother to move their money. Tony Chan, a financial adviser in Orange, Calif., said he recently met with a new client who had about $1.2 million in an account earning 0.01% a year, or roughly $120. Mr. Chan said the money was previously invested in the stock market, but the client sold his holdings last year out of fear and has been too busy to find a good place to put it.
Mr. Chan recommended the client move most of the money into a higher-yield account and the rest into certificates of deposit. He estimates that these switches would yield at least $36,000 in interest annually.
Depositors’ inertia can be strong, to their detriment. In a study published in 2021, researchers analysed the behaviour of customers at five U.K. banks. The average customer stood to gain £123 a year, or about $190 at the time, from moving their money to a higher-yield account, yet the researchers found that switching is “rare” and that even customers with relatively large balances were no more likely to do so.
In a follow-up survey, 66% of respondents said that switching accounts would be worthwhile for them if they gained at least £100 in annual interest. But in one subset the researchers studied, despite the fact that 26% of customers could have gained at least that much by switching, only 3.5% actually switched.
“The biggest reason consumers don’t seem to reoptimise their finances seems to be a belief that it will be a huge hassle,” said Christopher Palmer, a professor of finance at MIT’s Sloan School of Management and a co-author of the study. The study also found that customers tend to overestimate how much of a hassle it actually is, and underestimate how much their interest rate might increase.
Financial advisers consider it prudent for people to cart their money elsewhere if they can find a better offer. Savers can also consider safe high-yield alternatives to bank accounts, such as government I Bonds.
Mr. Chan advises clients to keep about one month’s worth of expenses in a checking account and to seek out a high-yield savings account for cash that they want access to in the next couple of years but don’t need to draw on imminently.
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
Sales of the cosmetic product are a bright spot in an otherwise bleak discretionary-goods environment
Masks off, lipstick index on.
In a gloomy economy, consumers might cut back on other discretionary purchases but will keep shelling out for small luxuries such as lipstick—or so goes the theory. “When lipstick sales go up, people don’t want to buy dresses,” Leonard Lauder, then-chairman of Estée Lauder who is widely credited for coming up with the so-called “lipstick index,” told The Wall Street Journal in 2001.
L’Oréal Chief Executive Nicolas Hieronimus called this out during the company’s earnings call in October, noting that a luxury lipstick or mascara is only €30, making it an “affordable treat.” Sales at L’Oréal rose 9.1% in the third quarter compared with a year earlier despite slower sales in China due to Covid-related lockdowns. Coty, maker of CoverGirl makeup, said organic sales grew 9% over the same period.
Beauty sales have also been a rare bright spot for retailers: Target said beauty category sales grew roughly 15% in its quarter ended Oct. 29 compared with a year earlier, with Ulta Beauty shops in Target tripling their total sales volume over that period.
While Macy’s namesake stores saw comparable-store sales decline last quarter, its beauty-focused Bluemercury chain saw same-store sales grow 14% last quarter compared with a year earlier. Kohl’s locations with Sephora are outperforming the rest of the department-store chain.
Of the 14 discretionary categories that market research firm NPD Group tracks, prestige beauty—products you might find at a department store or a Sephora—is the only category that is seeing unit sales growth year to date. And lipstick, which suffered during the masked-up pandemic, is making up for lost time.
Lipstick sales have grown 37% through October this year compared with a year earlier, according to Larissa Jensen, beauty industry analyst at NPD Group. That is an acceleration from the 31% growth seen during the same period last year. Lip product is the only major category within prestige beauty where sales are actually up compared with pre-pandemic levels, according to Ms. Jensen.
Cosmetic companies have also called out strong sales in fragrances, calling it the “fragrance index.” Demand has been so robust that there is an industrywide fragrance component shortage, Coty said in a press release announcing third-quarter earnings earlier this month. CEO Sue Nabi said during the call that Coty hasn’t seen any kind of trade-down or slowdown, also noting that consumers are shifting away from gifting perfume to buying it for themselves.
“A big piece of it is just a shift in what wellness means to consumers,” NPD Group’s Ms. Jensen said. “Beauty is one of the few industries that are positioned to meet [consumers’] emotional need. It makes them feel good.”
While the lipstick effect could be observed in the recession in the early 2000s, that wasn’t the case during the 2007-09 recession, during which lipstick sales declined alongside other discretionary purchases. Part of this might have had to do with category-specific dynamics.
There was a lot of newness in the cosmetic industry in 2001, including lip gloss, a relatively nascent category back then. That tailwind simply wasn’t there starting in 2008, though nail polish turned out to be consumers’ small indulgence of choice in that period. This time around, consumers may be eager to show off a part of their face that was hidden behind a mask for so long during the pandemic.
In an otherwise bleak environment for companies selling discretionary goods, those in the business of selling cosmetics look well poised to come out of the holiday season looking freshened up.
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